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2008 economic crisis had minor effect on insurers

The major impact of the recent financial crisis on insurers was on certain annuity products underwritten by the life insurance industry, according to a Government Accountability Office (GAO) study released today.

The report said that the crisis “generally had a limited effect on the insurance industry and policyholders.”

However, the stock prices—based on an index of 21 life insurers—declined by an aggregate of 79 percent between November 2007 and February 2009, the report said.

“Although stock prices rose starting in March 2009, they had not rebounded to pre-2008 levels by the end of 2011,” the report said.

In comparison, the New York Stock Exchange Composite Index declined by a total of 55 percent during the same time period, the report said.

The primary impact of the crisis was on life insurers that offered variable annuities with optional guaranteed living benefits.

The report said a dozen large life insurance groups accounted for 77 percent of the total realized losses in 2008, with American International Group (AIG) alone accounting for 45 percent of the realized losses.

The report said that life insurers’ net income suffered a loss of $52.2 billion in 2008. This compared to $31.9 billion in 2007.

The report also said net income rebounded to $21.4 billion in 2009, largely as a result of decreased underwriting losses and expenses. Income increased further to $27.9 billion in 2010 but fell again—to $14.2 billion—in 2011.

The capital deterioration in 2008 reflected declines in net income and increases in unrealized losses on investment assets. "Realized losses of $59.6 billion contributed to steep declines in life insurers’ net income that year,” the report said.

The report said that total unrealized losses of $63.8 billion in the life insurance industry, combined with the decline in net income, contributed to a modest capital decline of 6 percent, to $253.0 billion, in 2008.

The report said that, as with realized losses, AIG accounted for 47 percent of total unrealized losses, and seven large insurance groups accounted for another 35 percent.

The majority of the unrealized losses occurred in common stocks and other invested assets, such as investments in limited partnerships.

The capital losses were addressed by issuing new stock or debt in the capital markets, or transfer of capital from the holding company to the life insurance subsidiaries, the report said.

The Treasury and the Federal Reserve Board also provided capital, most of it to AIG, the report said.

AIG accounted for 55 percent of the capital infusions in 2008, through the purchase by the Treasury of $40 billion in equity, the report said.

Many publicly-traded life insurers or their holding companies continued to pay stockholder dividends throughout the crisis.

Life insurers’ capital increased 15 percent to $291.9 billion, from 2008 to 2009, partly as a result of the increase in net income, the report said.

By 2011, life insurers had net unrealized gains of $20.8 billion, indicating improvements in the value of their investment portfolios.